Moody's Urges South Korea to Hurry Fiscal Reforms as Debt Ratio Nears 60%

Global credit rating agency Moody's has cited the rapid increase in South Korea's government debt-to-GDP ratio as a risk factor for future rating assessments. It expressed concern that the pace of the national debt build-up could accelerate under President Lee Jaemyung's expansionary fiscal stance and due to implementation costs arising from the Korea-U.S. investment agreements.

Moody's noted that while the current government debt ratio, in the 50% range relative to gross domestic product (GDP), is not in itself a threatening level that would trigger an immediate downgrade, it could become a major risk if the situation persists over the long term, and it urged fiscal reform.

Moody's recently announced that it would maintain South Korea's sovereign credit rating at its existing level of "Aa2, stable." This is the official assessment based on the findings of the annual review for rating evaluation, conducted after Moody's inspection team visited the Ministry of Economy and Finance and other Korean government bodies in the second half of last year and this January.

Moody's upgraded South Korea's rating by one notch from Aa3 to Aa2 in December 2015 and has kept it at the same level for 11 consecutive years. In Moody's rating scale, Aa2 is the third-highest rating, following Aaa and Aa1.

While maintaining the "Aa2" rating, Moody's nevertheless identified the sharp rise in government debt as a key risk factor and called on the authorities to pursue fiscal reform to mitigate this risk.

South Korea's fiscal deficit has continued every single year since the 2008 global financial crisis, and since the pandemic in 2020 the managed fiscal balance has turned the country into a chronic deficit nation, with annual shortfalls of around 100 trillion won. The government debt-to-GDP ratio has more than doubled from 25.7% in 2008 to 51.6% this year, drawing criticism that the speed of debt accumulation is unprecedentedly fast.

Moody's explained that fiscal policy has been expansionary over the past year and is expected to remain so at least through 2028, adding that the debt burden has risen from 35% in 2019 to about 50% in 2025, converging from a very strong starting position toward the average level of advanced economies.

It projected that this upward trend in the debt ratio will continue, with the figure exceeding 60% of GDP by 2030. It cited mandatory spending related to aging, such as pensions and healthcare, as well as defense and national security commitments, and strategic obligation implementation costs stemming from the Korea-U.S. investment agreements, as the main drivers of debt growth. Moody's pointed out that "the risks from rising debt burdens and contingent liabilities hinge on fiscal reform."

According to the February issue of the Monthly Public Finance Trends recently published by the Ministry of Economy and Finance, last year's annual national tax revenue increased by 3.74 trillion won from the previous year, but despite the rise in revenue, the increase in expenditure exceeded this, making the issuance of deficit-financing government bonds unavoidable.

It also raised concerns that the debt of public corporations will adversely affect fiscal soundness. Moody's stated, "In 2024, the total debt of non-financial public sector (NFPS) corporations reached more than 17% of GDP, up from 15% in 2021," and assessed that "debt in the non-financial public sector is likely to put further pressure on overall fiscal soundness."

Previously, another global credit rating agency, Fitch, also warned in a report released on January 30 that, while maintaining South Korea's rating at "AA-, stable," "structural issues stemming from population aging and rising government debt could weaken creditworthiness over the medium to long term."